Juander How – Page 2

As more and more Filipinos are now venturing toward online businesses or are now earning from non-traditional sources of income, the government is reminding the public1 of their duties as business owners (e.g. taxes, business registration, and labor laws). The general rule is that if you are regularly earning income outside an employer-employee relationship, then you are considered to be engaged in business regardless of the level of your sales. We all want to earn money but failing to take into account the laws and proper procedures on how to register your business will surely backfire. We would like to guide your business registration to ensure that your business runs smoothly and help you avoid unnecessary penalties. Disclaimer: This article shall only be used for learning purposes and is not a substitute for legal advice. What Are the Benefits of Registering Your Business in the Philippines? 1. Tax returns are proof of income. These are documents that certify your ability to pay. If you have applied for a loan, a credit card, or rented a condominium, you may have been asked for your tax return documents as a requirement. Tax returns are a great way to say that you are earning regularly and are capable of paying your obligations. 2. Secures reputation as a legitimate business. When dealing with other businesses or big clients, it is almost mandatory to provide a certificate of registration. This will allow you and other businesses to determine whether the other party is a legitimate business and is not just a scam. 3. Hassle-free transaction with other legitimate businesses. If you have ever dealt with ‘colorum’ or illegitimate businesses, you know how much of a hassle they are for your accounting records. The tax code requires businesses to list all their suppliers and compile all receipts pertaining to their transactions in order to claim business expenses2. Dealing with ‘colorum’ businesses means you can’t claim business expenses for your transactions with them. Conversely, if you are not registered, you cannot issue valid receipts. In turn, this will jeopardize your customer’s ability to claim their payments as a valid expense. This can be a reason why some businesses will avoid dealing with you, as an unregistered supplier. 4. Low-interest loans and other government benefits. For all businesses: The government provides free seminars for registered businesses as long as they provide the required documents. For example, the BIR gives free tax briefings for new registrants to teach them about their responsibilities as business owners. The DTI also provides free seminars, listed here, which allow business owners to learn from other successful entrepreneurs on what to do, where to get suppliers, when to expand, etc. The DTI also provides free services like logo making, branding, and consultations with professionals. For BMBEs3: BMBE qualified businesses that are also employers are exempted from the Minimum Wage Law. This means that they can legally pay their employees an amount lower than allowed by law. However, it is still required that the BMBE shall pay a reasonable amount to its employees and provide them with social security benefits (SSS and PAG-IBIG) and mandatory healthcare (PhilHealth). 5. Avoid unnecessary penalties and avoid the risk of getting jail time. Failure to register your business and timely filing of your tax returns are considered crimes. Yes, if you neglect your responsibilities as a taxpayer, you may risk getting imprisoned. This is the most common form of tax evasion and is punishable by a fine of between PHP 500,000 and PHP 10,000,000, and from 6 to 10 years in jail4. Fortunately, the BIR has made a compromise that the taxpayer has the option to just pay a specified amount instead of being imprisoned. Needless to say, the amount will make a dent in your pockets. Who Are Exempt From Registering Their Business? Those who are earning income exclusively from an employer-employee relationship (Salaries or Wages);Those who are earning exclusively from passive income (i.e. Pensions, Dividends from Domestic Corporations, Interests from Bank Deposits, etc.);Those who are employees but at the same time earning passive income; andThose who are not earning any income from any source. Business Registration in the Philippines: 4 Steps. Step 1: Choose your business structure. A. Sole Proprietorship (Self-employed Individuals/Professionals). This shall include all businesses owned by only one person, including freelancers and professionals. If you are planning to sell homemade food, clothes, medical paraphernalia, or want to raise money from digital advertising by blogging and vlogging, registering as a sole proprietor is beneficial because it usually has lower taxes and fewer regulations to comply with. However, a sole proprietorship does not distinguish its owner from the business, i.e. any transaction made by the business reflects on the owner of the business. So if you have excess liabilities in your business, your creditors can sell your personal belongings to compensate. B. Corporations and Partnerships. Any business with more than one owner belongs to this group. The main benefit of creating a corporation or a partnership is that the business can have more funds to operate and expand since there is more than 1 investor. This will also make business management more flexible since you and your co-owners can share responsibilities based on your strengths. However, the catch is that corporations and partnerships are heavily regulated and are taxed more than sole proprietors. They are generally taxed at a regular income tax rate of 30 percent and any transfer of wealth from the corporation/partnership to its owners is also taxed at a dividend rate of 10 percent. They also have additional operating requirements, and different attachments when filing their returns. To illustrate: A business earning PHP 10,000,000 in taxable income will incur the following income taxes: Corporations. Regular Corporate TaxPHP 3,000,000Dividend TaxPHP 668,500Total TaxPHP 3,668,500 Sole Proprietor. Graduated Income TaxPHP 3,110,000Total Tax PHP 3,110,000 Related: How to Compute Your Income Tax Using the New BIR Tax Rate Table Note: There is a difference of PHP 558,500 in taxes;Dividend Taxes are only incurred when actually withdrawn by the owner; andThis only includes the taxes that are different for both business structures. Choosing the best business structure for you. Determining which business structure works for you depends on your intention, ability to be compliant with different regulations, risk appetite, and capacity to produce capital for your business. Sole proprietorship/Self-employed professional - these are for people who want an easy way to own a business without worrying too much about highly technical laws. If you have the capital to set up and run a business, this is the best business structure for you. One-person Corporation - these are for people who want the prestige of owning a corporation with the benefit of becoming the only one responsible for decision-making while also securing your personal assets from creditors. Related: What is the difference between a one-person corporation and a sole proprietorship?Domestic Corporation - these are for people who want to create a large-scale enterprise since this business structure enables them to have more than 5 investors. Every industry leader creates a domestic corporation that allows them to gather more capital for expansion purposes. General Partnership - If you cannot create a business on your own due to a lack of capital but also do not want the added responsibility of a corporation, then this may be the best business structure for you. This will allow the owners to gather more capital by inviting more partners into the business while limiting the number of requirements when dealing with government agencies. Keep in mind that taxation is the same for all corporations and partnerships. Others – there are other business structures available for new registrants like General Professional Partnerships, Resident Foreign Corporations, and Cooperatives. However, their taxation and management are almost the same as the other four. Step 2: Register your business name and/or corporate name. Update: In January 20215, the first phase of the Central Business Portal (CBP) was launched by the Anti-Red Tape Authority. The website is a one-stop portal for all business registration needs with the goal of turning the current 33 days processing time to only half a day. However, as of January 2022, it still has limited functions. Currently, it’s best for domestic corporations based in Quezon City and Paranaque. If that’s you, you can do steps 2 to 4, that is processing your business name with the SEC, doing your BIR registration, and applying for a business permit by only using the CBP. A. DTI (For Self-employed individuals). Applying for a business name is required for all business owners that wish to use names other than their birth name for their business. Businesses, by default, must be named after the owner (e.g. Juan Dela Cruz), so if you want to name your business “Aling Dolly’s Online Shop”, then you are required to apply for business name registration with the DTI. However, you may skip this step if you are a freelancer or a professional, whose income solely comes from providing services. B. SEC (For Corporations and Partnerships). Business name registration is different for corporations and partnerships. Instead of DTI, you have to do the registration with the Securities and Exchange Commission or SEC. For more information about SEC business name registration, click here. Step 3: Apply for a certificate of registration with the BIR. All businesses are required to register with the BIR. This will allow taxpayers to pay their tax dues and enjoy the benefits of a legit business. The general process to register is as follows: Accomplish BIR Form 1901 for sole proprietors or BIR Form 1903 for corporations/partnerships;Submit the filled-out forms together with the requirements to the RDO where your business is located;Pay the corresponding registration fee; andClaim the Certificate of Registration on the scheduled date. Read More: How to Register a Business with BIR: An Ultimate Guide Step 4: Apply for a business permit. It is best practice to secure a business permit from the Local Government Unit (LGU) governing the city where your business is situated before starting your business. You can get this done at the same time as your BIR registration6. To apply for a business permit/mayor’s permit, you must: Secure all documents as required by your LGU;Have your location assessed by the local fire department;Pay the corresponding assessment fees; and Claim the mayor’s permit on the scheduled date. Learn More: How to Get a Business Permit in the Philippines: An Ultimate Guide Additional Requirements if You Have Employees. Any business with employees must register with the DOLE, SSS, PhilHealth, and PagIBIG. Fortunately, the whole process may be done in Philippine Business Registry (PBR) kiosks which are available in selected DTI and SEC offices. Meaning, if the kiosks are available, you may register all these employer IDs in one setting. Steps: Accomplish PBR Form;Submit to the DTI Teller together with 1 photocopy of the SEC Certificate (if applicable). Bring the original copy for verification;Pay the corresponding fee; and Claim Employer Registry Numbers (SSS, PhilHealth, and PagIBIG). Other Government Licenses. Some businesses are required to secure special licenses from the government. This allows the government to keep track and regulate the products/services that these businesses are selling to the market. Food and Drug Administration (FDA) - when involved in the manufacture, importation, exportation, sale, offering for sale, distribution, transfer, promotion, advertisement and/or sponsorship of the following products in the Philippines:Drugs;Pharmaceuticals;Medical devices;Cosmetics;Processed Food;Toys;Child care articles;Veterinary products; andHousehold/urban pesticides.Bangko Sentral ng Pilipinas (BSP) - when dealing with finance companies like banks, pawnshops, and money service businesses. Securities and Exchange Commission (SEC) - when dealing with investment companies. What Are the Penalties if I Did Not Register My Business? Based on RMO 7-20157 (For All Businesses). ViolationPenalty Failure to register PHP 20,000 Failure to keep/preserve records required by law or regulations PHP 1,000 to PHP 50,000 Failure to have books of accounts audited and have the financial statements attached to the income tax return certified by an independent CPA duly accredited by the BIR PHP 3,000 to PHP 25,000 Failure to make, file, or submit the complete quarterly Summary Lists of Sales and Purchases-Local & Imported (SLSP), the Annual Alpha List of Payees and/or Employees subjected to withholding taxes, or supply correct and accurate information therein at the time or times required by the Tax Code, as amended, or other existing rules and regulations PHP 1,000 to PHP 25,000 Failure to submit any other attachments required by law PHP 1,000 to PHP 25,000 Failure to submit tax returns on time PHP 1,000 to PHP 25,000 Failure to withhold or remit withheld taxes at the time required by law or regulations PHP 1,000 to PHP 25,000 Failure or refusal to issue receipts or sales or commercial invoices; issuing receipts invoices not truly reflecting and/or containing all information required therein or using multiple or double receipts or invoices PHP 10,000 to PHP 50,000 Based on the SEC Scale of Fines series of 20058 (For Corporations Only). ViolationPenalty Late filing of General Information sheets and Audited FS PHP 500 to PHP 5,000 Non-filing of GIS and AFS PHP 1000 to PHP 10,000 Material Deficiency of AFS PHP 500 to PHP 4,000 Late Filing of Stock and Transfer Books PHP 2000 How Much Is the Total Cost of Business Registration in the Philippines? For Sole Proprietors. DTI. Registration of Business Name PHP 200 Documentary Stamp Tax PHP 30 GCASH Transaction Fee PHP 10 LGU. Business Permit Fees - including sanitary and fire license PHP 5,000 BIR. Annual Registration Fee PHP 500 Documentary Stamp Tax PHP 30 Registration of Books of Accounts PHP 800 Sales Invoice/Official Receipts (BPI/BPR) PHP 30 Total Estimated Cost of Registration: PHP 6,600 Note: For Professionals and Non-Licensed Professionals, you may skip the DTI Registration and secure a Professional Tax Receipt (for licensed) or an Occupational Tax Receipt (for non-licensed) from your City Hall. The business permit fee may vary depending on your LGU. The DTI fee may vary based on chosen territorial scope. For Partnerships. Articles of Partnership PHP 2,000 Legal Research Fee (1% of Articles Fee) PHP 20 Name Registration PHP 100 Documentary Stamp Tax on registration PHP 30 Application with LGU. Estimated Application Fee (all permits) PHP 5,000 Application with BIR. Registration Fee PHP 500 Sales Invoices PHP 30 Documentary Stamp Tax PHP 30 Books of accounts PHP 1,000 Total Estimated Cost of Registration: PHP 8,980 For One Person Corporations. Filing Fee (1/500 of authorized capital) PHP 2,000 Legal Research Fee (1% of Filing Fee) PHP 20 Name Registration PHP 100 Documentary Stamp Tax on registration PHP 30 DST on the original issuance of shares (1% of issued) PHP 5,000 Application with LGU. Estimated Application Fee (all permits) PHP 5,000 Application with BIR. Registration Fee PHP 500 Sales Invoices PHP 30 Documentary Stamp Tax PHP 30 Books of accounts PHP 1,000 Total Estimated Cost of Registration: PHP 13,710 The amounts are based on the following: Authorized Capital of PHP 1,000,000.Estimated shares to be issued once you invested cash and inventory – PHP 500,000.Application fee of LGUs shall include all necessary permits (e.g. fire fee, sanitary, etc.) DST on original issuance will be charged once the shares are actually received by the shareholder/s. For Corporations. It shall be computed as the total cost of registration of a one-person corporation (OPC) plus registration of By-Laws and Registration of stock worth PHP 1000 and PHP 150, respectively, which brings the estimated cost of registering domestic corporations to PHP 14,860. How long does it take for me to register my Philippine business? Sole Proprietor – DTI and BIR Registration may be done within 1 to 2 business days; LGU (Business Permit) Registration may take up to 6 weeks. Corporations and Partnerships – SEC registration may take 1 to 10 business days while BIR Registration may be done within 1 to 2 business days; LGU (Business Permit) Registration may take up to 8 weeks. How to Start Your Business Right. Starting your business right is just as important as having your business registered. Understanding your duties and responsibilities is essential for minimizing penalties and ensuring the continuity of operations. 1. Understanding the obligations of a business owner. a. Renewal of permits. Annual Registration Fee - paid annually to the BIR using BIR Form 0605 Employer’s Number (SSS, PhilHealth, PagIBIG) - these do not expire, however, you are required to update your information if the business changed ownership, place of business or created a new branch. Business Permits - Mayor’s Permit and the supplementary licenses given by the LGU are likewise renewed annually. These are paid together with the local business tax. Official Receipts/Sales Invoices - The authority to use the BIR printed receipts (BPR/BPI) expires after a year while Principal Receipts/Invoices printed by authorized printers expire after 5 years. b. Employer’s Responsibilities. Pay salaries/wages on time;Provide benefits to employees;Pay overtime;Pay night shift differential when total employees exceed 5 persons; andOthers as required by law and regulations. 2. Understanding tax returns. Income Tax - this is filed using BIR Form 1701 series for sole proprietors or BIR Form 1702 series for corporations/partnerships. Other Percentage Tax - This is filed using BIR Form 2551Q by businesses who are not subject to VAT and did not avail of the 8% preferential rate. Value-Added Tax - This is filed using the BIR Form 2550 series by businesses who are mandated to pay VAT. Expanded Withholding Tax - This is filed using BIR Form 0619 series and the 1601 series by businesses who are required to withhold taxes i.e. Corporations, Top Withholding Agents, Online Sellers, etc. Local Business Tax - This is a requirement for renewing your City Hall business license. The rate depends on your municipality. 3. Basic computation of taxes. Tax dues are now automatically calculated when using eBIR Forms and eFPS. However, it's still important to know what amounts belong to each component, since failure to include or exclude certain items may be subject to severe penalties. These are the main components used in all tax returns: Gross Sales - This shall include all earnings for the period without any deductions aside from sales discounts and sales returns. Gross Receipts - This shall include all cash receipts for the period without any deductions. Non-operating income - This shall include gains from sale of properties that are not considered as inventory. (i.e. Sale of Land, Dividend Income from Foreign Corporations etc.)Net Purchases - This shall include all purchased inventory for the period. This is particularly important for VAT taxpayers. Cost of Goods Sold - This is the cost of goods sold for the period. Gross Income - This is computed as Gross Sales plus non-operating income less cost of goods sold. Itemized Deductions - These are the only business expenses allowed by the BIR to be deducted from the Gross Income. Taxable Income - This is computed as Gross Income less Itemized Deductions. This is generally the tax basis for income tax. 4. File tax returns on time. The following is a summary of the deadlines for businesses using the calendar year: Tax Type BIR Form to be used Deadline Income Tax - Sole Proprietor BIR Form 1701Q May 15 (1st QTR) BIR Form 1701Q August 15 (2nd QTR) BIR Form 1701Q November 15 (3rd QTR) BIR Form 1701 or BIR Form 1701A April 15 of the following year (4th QTR) Tax Type BIR Form to be used Deadline Income Tax - Corporations (Calendar Year) BIR Form 1702Q May 15 (1st QTR) BIR Form 1702Q August 15 (2nd QTR) BIR Form 1702Q November 15 (3rd QTR) BIR Form 1702RT or 1702EX April 15 of the following year (4th QTR) Tax Type BIR Form to be used Deadline Other Percentage Tax BIR Form 2551Q Quarterly - On or before the 25th following the end of the quarter Tax Type BIR Form to be used Deadline Value Added Tax BIR Form 2550M Monthly - On or before the 20th of the following month IR Form 2550Q Quarterly - On or before the 25th following the end of the quarter Tax Type BIR Form to be used Deadline Expanded Withholding Tax BIR Form 0619E or 0619F Monthly - 10th day of the month following the payment BIR Form 1601EQ or 1601FQ Quarterly - On or before the end of the quarter Tax Type BIR Form to be used Deadline Local Business Tax Annually - On or before January 20 of the following year 5. Keeping your books of accounts. According to the tax code9, all businesses are required to record their transactions using registered books of accounts. This enables the company to complete account information returns to be attached to its tax returns and helps certified public accountants to create the audited financial statements required by the SEC and BIR. 6. Attachments. One of the most common mistakes by new businesses is that they do not attach the required documents to their tax returns and they are surprised when they receive letter notices since they didn’t even know that these are important. According to the tax code and the current revenue regulations, the following must be submitted together with their corresponding tax returns: Audited Financial Statements (AFS) – Under Section 232 of the tax code, taxpayers whose sales exceed PHP 3,000,000 shall have their books of accounts audited by a CPA. They shall also attach a copy of the audited FS in their annual income tax return. Account Information Return (AIF) - If your sales for the year did not exceed PHP 3,000,000, you still need to submit an Account Information Return detailing the balances of your assets, liabilities and equity and a comparative income statement. This shall be filed using BIR Form 1701-AIF if you are a sole proprietor or 1702-AIF if the business is a corporation/partnership. However, this is not required for businesses that used OSD or the 8% preferential rate. Related Article: Which should I choose: Itemized Deduction or Optional Standard Deduction?Statement of Management’s Responsibility10 – this shall signify the liability of the owner/managers of the company in the event that the financial statements and tax returns filed are fraudulent or false. This shall be attached to the annual income tax return. BIR Form 2304 – Otherwise known as Certificate of Income Payment Not Subject to Withholding Tax, this document shall be given to you by your customers who are engaged in business but did not withhold tax on their payments. This must be given to you on or before January 31 of the following year. The certificate shall be attached to the annual income tax return. Quarterly Alphalist of Payees (QAP) – This shall contain all the names of payees included in your 1601EQ and 1601FQ returns. This shall be attached to the 1601EQ and 1601FQ returns.Summary List of Sales (SLS) – This is the complete list of all your customers. Fortunately, the BIR is only strict with the requirements when the taxpayer is transacting with other businesses. A CTA case allowed the usage of “various customers” when the customer is an individual. This shall be filed together with your monthly and quarterly VAT returns.Summary List of Purchases (SLP) – This is the complete list of all your suppliers. The BIR is extremely strict when it comes to implementing this requirement. The format, form of document, etc. must be followed exactly as the BIR intended. This must be filed together with your VAT Returns. This is the same with SLI except this only includes local suppliers.Summary List of Importation (SLI) – Likewise, if you import any goods used in your business, you need to list those suppliers. This is the same with SLP except this only includes foreign suppliers. 7. Issuance of valid invoices/receipts on transactions including online-based payments. Under the tax code11, for every transaction exceeding PHP 100, the business must issue a sales invoice (for sale of goods) or an official receipt (for sale of services). It does not matter if the customer asks for a receipt, it is your obligation to issue proof of payment, otherwise, you may face penalties. For online-based payments, BIR allows the seller to scan and issue the receipts to the buyer electronically12. Related: How to Reduce Your Taxes Legally if You Own a Business Frequently Asked Questions. 1. I’m an online seller/Youtuber/blogger. Do I need to register my business? Yes. As long as you intend to continuously earn income from these businesses. RMC No. 55-2013 states that there is no distinction between online businesses and businesses with physical stores. This means that you are required to comply with the same obligations as an ordinary business (i.e. registration, payment of taxes, bookkeeping, etc.) 2. I’m earning from Google Adsense which is based internationally. Do I still need to report that income? Based on the existing jurisprudence13, as long as you are earning within the Philippine Jurisdiction you must be taxed under Philippine laws. Therefore, as long as your content is made in the Philippines, or your product is sold within the Philippines, or you’re providing service from your home (as a freelancer) then you are considered as earning within the PH. Related Article: Situs of Taxation: How to Know Which is Taxable and Which is Not Taxable 3. What if the foreign company already taxed my income? Should I still register my business? Yes. Withholding tax by your employers/customers does not exempt you from registering your business. You are still required to report your income in your tax returns and pay the corresponding tax dues. 4. What can I do with the withheld tax? You may claim them as tax credits. This lowers the tax due equal to the amount they withheld subject to a few requirements. 5. I earn less than PHP 250,000 a year, do I still need to register my business? Yes. There is nothing in the law that exempts businesses earning lower than PHP 250,000 annually from registering their business. It is a common misconception that as long as you have 0 income tax due, you are not required to register. Remember, there are other taxes that a business must pay i.e. Value-Added Tax, Expanded Withholding Tax, and Local Business Tax. 6. If I failed to register my business previously, is there a way to register without incurring penalties? With the rise of online businesses, the BIR acknowledges that the layperson is not always up-to-date on recent tax legislation. That’s why new registrants, online sellers, and businesses with physical stores alike, were given the opportunity to legalize their business14 before September 30, 2020, without incurring any penalties. However, they are still encouraged to report their past earnings and pay the corresponding tax due. To illustrate: Juan created an online store to sell clothes on the Facebook Marketplace in 2018. He earned a total of PHP 500,000 during the last 2 years of operations. Before RMC 60-2020, he would’ve been penalized for non-registration and non-filing of tax returns in the amount of PHP 20,000 and PHP 38,500, respectively. He is also liable for the PHP 70,000 tax due he should’ve paid. This means that if Juan had been audited by the BIR, he would have been jailed unless he paid PHP 128,500 or about 25% of his total earnings. Thanks to the current circular, if he pays PHP 70,000 and registers his business properly with the BIR, he is now exempted from the penalties. Computation: Penalty for non-registration = 20,000Income Tax Due = 55,000 based on the graduated rates of 2018 and 2019Other percentage tax = 15,000*Surcharge for non-filing of tax = 70,000*25%Interest for non-filing of tax = 70,000*12%*2.5 years 7. I'm done with the business registration. When can I start operating? It is recommended to operate once you’re registered with all relevant government agencies i.e. DTI/SEC, BIR, and LGU. But since the LGU permits take a long time to process, some municipalities allow businesses to operate once the business has already received the Certificate of Registration from the BIR. 8. Do I need to hire an accountant for the business registration (and beyond)? There are many factors to consider when deciding whether or not to hire a certified public accountant (CPA). The only time when you are really required to hire a CPA is when you need to submit Audited Financial Statements. Apart from that, the decision boils down to the fact of whether or not you can handle the legal implications of your day-to-day operations, making sure that there are no unreported relevant transactions. 9. What is the difference between a trade name and a business name? A Trade Name is the company’s legal name. If it is a sole proprietor, then the trade name is the owner’s birth name. Business Names, on the other hand, allow businesses to alter their trade names when transacting with other parties. Think of it as a pen name for authors. Without business names, the Philippines will be flooded with unique, albeit ridiculously named businesses. For example, Juan Dela Cruz is a freelance copywriter. His default trade name is “Juan Dela Cruz”. If he exclusively provides services, he is not required to register with the DTI since service providers can use their trade names as their business names. However, if he owns a sari-sari store, he must register a business name that accurately describes the store i.e. “Juan’s Sari-sari Store”. Related: How to Register a Franchise Business in the Philippines References.